UBS cuts target prices on bank stocks by 5-41%

Mumbai: UBS has cut target price of banks by 5-41% as it believes risk-reward remains unfavorable in the sector while risks to collections and credit culture are rising.

The brokerage has downgraded its rating on HDFC Bank to neutral from buy and cut target price on it to Rs 1,000 from Rs 1,075 as it believes HDFC Banks’ premium valuation is likely to narrow given rising risks in retail and small businesses.

UBS has also downgraded SBI to sell from buy and cut target price on it to Rs 160 from Rs 270. SBI’s valuations appear inexpensive but the operating environment has weakened further, said UBS.

ICICI Bank and Axis Bank are UBS ‘most preferred picks while Kotak Mahindra Bank and Punjab National Bank are least preferred.

The brokerage said that given the extension of the lockdown and COVID-19 infection rates in India, economic activity will be disrupted for two-three months, which is likely to intensify asset quality deterioration.

“NPL risks for IndusInd and SBI are likely to remain high due to their exposure to the worst-hit segments like small businesses, MFIs, and CV and construction equipment portfolios. Despite strong underwriting, we think risk to HDFCB’s (HDFC Bank) asset quality is rising due its exposure to vulnerable customer segments and uncertainty around the duration of lockdown, “said UBS. Significant intervention by the government or Reserve Bank of India could reduce the severity of the impact, the brokerage said.

UBS has maintained target rating on ICICI Bank and cut target price to Rs 430 from Rs 450. It has reduced target price on Axis Bank to Rs 570 from Rs 600 while maintaining a buy rating.

The brokerage has reduced target price on Bank of Baroda to Rs 55 from Rs 60, and on Federal Bank to Rs 45 from Rs 50. The brojerage has a sell rating on IndusInd and PNB. The brokerage has cut target price on IndusInd Bank to Rs 300 from Rs 400 and on PNB, it has lowered target price to Rs 32 from Rs 35.